Letter From ACOW re: "Green" Valuation

Here are the comments on behalf of ACOW regarding the "Department of Commerce's 2011 Strategic Plan regarding Energy Efficiency," directed to Chuck Murray, Department of Commerce:


December 6, 2010

Chuck Murray
Department of Commerce
P.O. Box 42525
Olympia, WA 98504-2525

Re: Public Comment Draft—Department of Commerce 2011 Strategic Plan for Enhancing Energy Efficiency and Reducing Greenhouse Gas Emissions from Homes, Buildings, Districts and Neighborhoods

Dear Mr. Murray:

On behalf of the almost 4,000 real estate appraisers in Washington State, we would like to take this opportunity to provide comments on the issue relating to the valuation of green residential properties highlighted on Page 19 of the Public Comment Draft: Financing—Appraisals.

We applaud your effort to ensure that housing (and our community) is more energy efficient, healthy and environmentally sustainable. As professional appraisers, we are pleased to see attention being paid to the appraisal process by your department.

We are concerned about this proposal for a variety of reasons, 1) Cost doesn’t always equal value, 2) Appraisers need to have the information, and 3) Dictating value adjustments is inappropriate and jeopardizes the independence of the appraisal process. We are also concerned that input from the appraiser community was apparently overlooked in the four work groups, and we hope that this letter will rectify this oversight. It appears the work groups intend to elevate recognition of energy efficient items in the real estate appraisal process. While we support that goal, we believe your department should consider the following:

1. Many home owners or other property owners may not know that appraisers themselves do not establish the market for a property – the appraiser merely reflects and reports on the market, and uses empirical-based market data to estimate the market value of a property.

If the market and market participants (i.e., buyers) do not yet recognize and/or adequately account for the perceived benefits of a “green” building in the way of an enhancement to the market value of the property, then an appraiser cannot simply increase the estimated market value of the property in an appraisal report merely because some developers, builders, or lay persons “believe” or “feel” that the property “should be” worth more. All elements of value must be supported through and based on market activity (i.e., sales, predominantly, or through higher rents for example in commercial properties).

Unfortunately, despite the passion of “green” industry building representatives and advocates, in many or most cases, the greater market has not yet perceived a significant enhancement in the market value of “green” properties, and reflected that enhancement in the form of either higher sale prices and/or higher rents for properties sufficient to cover the added costs of this type of development.

It is critical and important for the lay person to bear in mind that “Cost” does NOT necessarily equal “Value” (i.e., “market value”). This is a fundamental appraisal issue, and that is why appraisers complete a highest and best use and/or feasibility analysis for many properties prior to their development – to answer the question as to whether the costs of a project will be recovered, inclusive of a developer’s profit, based on current market data. Just because a builder spends more money to construct a “green” (“energy-efficient”) home does NOT mean that the market will ultimately compensate for this in the form of a higher price for that home, or a price sufficiently higher to cover all costs (with or without a profit element).

2. We agree that providing information to appraisers “may also increase recognition of the value of the efficiency items”. The builders need to provide this information to the appraiser, and the appraiser needs to make the judgment as to the impact on value as evidenced by the market. An appraiser needs to have all of the information – from builder, realtor, home inspector, etc. – regarding energy efficient features in order to be able to consider this information as part of their analysis.

3. For the Department of Commerce to be coming up with set value adjustments for various energy efficient features is completely inappropriate and borders on inappropriate influence on the appraiser’s independent judgment. As I am sure that you are aware, pressuring appraisers to report values not supported by the market is illegal, and appraisers have been fighting this battle for years. An appraiser is required to be independent, objective, and unbiased. Appraisers are being blamed that – during the good economic times – they too often appraised properties “too high; now that the market has softened, and they are “too low.” With the passing of the Dodd-Frank Act earlier this year, there are sweeping new changes to “Appraisal Independence”; several agencies have recently released updated guidelines and announcements specific to this topic[1].

We would be pleased to meet with you or your staff to discuss alternative language that would achieve the goals of this task force in a way that is consistent with existing rules, regulations, methodologies, and current efforts underway.

Respectfully,

Justin Slack, SRA
President, ACOW

[1] For mortgage transactions secured by a consumer’s principle dwelling, refer to 12 CFR 226.36(b) under Regulation Z (Truth in Lending) through March 31, 2011. Also refer to 12 CFR 226.42, which is mandatory beginning on April 1, 2011. Regulation Z also prohibits a creditor from extending credit when it knows that the appraiser independence standards have been violated, unless the creditor determines that the value of the property is not materially misstated. Page 4 of 45 Footnote 14: Interagency Appraisal and Evaluation Guidelines (December 2, 2010—FDIC)

Results of 'green' hearing

On Wednesday this week a legislative hearing was held in Olympia to review a potential new law which would require appraisers to have specific ‘green building’ CE training before accepting an appraisal assignment for a residential or commercial structure built with ‘green’ components.

Stan Sidor's comment regarding the hearing outcome:

"The committee chair does not believe it will pass out of committee, though we are monitoring. Nothing more to do with/on it right now."

(Thank you to Dave Towne for this information.)

Kitsap Appraiser Needed to Attend Senate Hearing

All,

I did not receive this information until a day after it was due, but I am posting it so that everyone can be aware of what is happening "behind the scenes."

Michael Tabor

ACOW URGENTLY NEEDS (WOULD LIKE) TO HAVE AN APPRAISER FROM KITSAP COUNTY ATTEND A WA STATE SENATE HEARING TOMORROW, WED 1-20-10, AT 3:30 PM IN OLYMPIA ABOUT SENATE BILL SB6635 AND TO TESTIFY (BRIEFLY) ABOUT HOW IT IS CONSIDERED A “POOR PUBLIC PROCESS” TO INTRODUCE A BILL ON AN AFTERNOON, AND THEN SCHEDULE THE HEARING FOR THE VERY NEXT AFTERNOON, PROVIDING VERY LIMITED NOTICE TO AFFECTED CONSTITUENTS.

This pertains to a bill introduced by Sen. Karen Fraser that will require appraisers to have education in appraising “green” type properties. I can “guide” the “volunteer” as to exactly what to say, where to attend, etc. – just need someone who could be available on this short notice. The committee chairperson is Phil Rockefeller from the 23rd District, which covers much of Kitsap County (click on link for map). I will testify on ACOW’s behalf as to why ACOW OPPOSES this bill (copy attached), but it would be good to have an actual constituent there from the chairperson’s district to essentially “complain” to the that we were given very limited notice of this hearing.

Please poll your chapter members for anyone willing to attend, and have them contact me asap.

Thank you.

http://apps.leg.wa.gov/DistrictFinder/default.aspx?District=23

Stan Sidor

Bill Regarding CE for Appraising "Green" Buildings

On October 1, 2009, the Washington State Senate's Environment, Water and Energy Committee toured energy efficient homes in Olympia. During that tour, a local green-home developer mentioned problems with the undervaluing of green buildings by some appraisers. In response, Sen. Karen Fraser asked William Bridges [Sr. Staff Counsel, Washington State Senate, Environment, Water & Energy Committee] to draft a bill to require appraisers to take continuing education (CE) requirements on the valuation of residential green buildings.

Appraisers in Washington must currently take 28 hours of CE instruction roughly every two years. The proposed bill draft proposes to require that at least 7 of those 28 hours be related to the valuation of residential green buildings.
As appraisers everywhere know, cost does not necessarily equal value, and the issue of knowledgeability is dealt with by USPAP, which demands that appraisers be qualified (competent) to appraise the subject of an impending assignment.

This proposed bill is based on fundamental misunderstanding of property valuation and appraising, and should be smothered in the crib.

ACOW is working to change the language of the bill, in the event it cannot be thwarted outright. Please read the bill [here], and share your thoughts and suggestions with Stan Sidor, and the rest of us via the comment function of this blog.


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Footnote: USPAP’s Competency Rule states: “Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently…”

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